naturally going to alter the way the
instrument trades. The notional
trade size will decrease and the
pricing may become wider as market markers know they are in competition with others. Beyond that,
changes in capital requirements
for the sell-side as well as margin
rules, are factored into pricing given by the liquidity providers.

Has regulation impacted the number of counterparties you trade and
clear with?

SV: We are in an evolutionary envi-ronment, and it is prudent to havea number of strong and dependablecounterparties that you trade with.In general, we have increased thenumber of counterparties we tradewith over that past few years. Incertain areas where the marketstructure has allowed for a segrega-tion of execution and clearing, thecounterparties list has naturallyincreased. Electronic platforms areefficient meeting places for manytypes of participants to trade witheach other which may not havebeen possible bilaterally. In mostasset classes we have increased theuse of venues that have strong busi-ness models to aggregate liquidityby bringing a number of marketparticipants together.

Is there potential for the buy-side
to become market makers or direct
clearing members?

SV: It depends on whether a firm
is willing to take principal risk and
put capital at risk. You are seeing
some of the proprietary trading
firms becoming more active market
makers. I can see the buy-side
taking a more active role as a price
maker. A price maker is different
from a market maker – as a price
maker are you willing to declare
the price at which you will buy or
sell a security. Being a price maker
can be beneficial if there is a market event or for liquidity constraint
products.

There are conversations taking
place on whether buy-side firms
should become direct clearing
members. I believe there is a lot
of work that needs to get done
in order for asset managers to
consider this option. It would be
more of a defensive strategy if
clearing costs keep going up or the
number of clearing members keeps
decreasing.

How can your sell-side partners improve their services for derivatives
trading?

SV: We would like to see more
clearing members as there are only
a handful in Europe and the US
for interest rate swaps and credit
derivatives. In certain markets
that are liquidity constrained, the
buy-side and sell-side should work
together to create pools of liquidity
and all-to-all trading capabilities.
There are certain areas where we
can collectively improve, such as
the options trading infrastructure.
You now see, on a voluntary basis,
the adoption of swaptions and
single name CDS trading as cleared
products, which is a positive
outcome. We wouldn’t mind seeing
improvement in portability of portfolios or positions between clearing
members. In many products there